Discover takeover could “enhance competition with Visa and Mastercard”
Quick Take
Capital One’s Proposed Acquisition of Discover: Potential Efficiencies Abound
Capital One’s proposed acquisition of Discover has the potential to generate substantial welfare-enhancing efficiencies. Discover has seen a major reduction in profits recently. It lags far behind Visa and Mastercard (the “big two” credit card companies), and American Express in credit card services, and the acquisition could make it a more effective competitor. Capital One could, for example, use the Discover payments platform to enhance competition with Visa and Mastercard.
Notably, Capital One has used recent acquisitions to create new products that generate economic benefits, including enhancements in Capital One Shopping (through the acquisition of Wikibuy), Capital One Travel (through a partnership with Hopper), and Capital One Dining (through a collaboration with SevenRooms). These improvement make consumers better off.
Furthermore, in its press release announcing the proposed acquisition, Capital One pointed to several specific efficiencies, including (among others):
Creat[ing] a global payments platform at scale, with 70 million merchant acceptance points in more than 200 countries and territories;
Position[ing] the combined company to compete with the largest payments companies and deliver enhanced value to a franchise of over 100 million customers;
Enabl[ing] Capital One to leverage its customer base, technology, and data ecosystem to drive more sales for merchants and great deals for consumers and small businesses; and
Leverag[ing] Capital One's eleven-year technology transformation across a much larger enterprise.
When the Justice Department (which reviews credit card and bank mergers) analyzes the likely competitive effects from this transaction, it should take into account these potential large efficiencies, and focus on consumer welfare by analyzing specific antitrust markets affected by the deal. It is to be hoped that DOJ will not take the position that the deal is problematic simply because of the large size of the merged firm. A focus on size alone would be antithetical to sound economics and could harm consumer welfare.